Wednesday, July 11, 2012

Taming FATCA

For US persons living abroad, living their lives means having foreign bank accounts. Regimes like FATCA and FBAR are particularly harsh for these persons, many or perhaps most of whom are either dual citizens themselves or are in families with dual and multiple citizenships. While it seems clear to me that the US can impose its sovereign jurisdiction with regimes like FATCA and FBAR, it's less clear to me that it should do so, especially with a one-size-fits-all approach that appears to treat everyone with a foreign bank account as a potential tax criminal. The question is whether and how these regimes can be tamed so that they fulfill the core mission--catching tax cheats--without becoming a Team America: World Tax Police, bypassing bilateral and multilateral cooperation among governments in order to impose draconian US rules on individuals and financial institutions across the globe.

In my latest Tax Notes International column, "Could a Same-Country Exception Help Focus FATCA and FBAR?" [pdf], I discuss some of the political and practical issues of relaxing the reporting rules for Americans living abroad with respect to accounts they hold in their country of residence. This is not a comprehensive technical proposal but rather a broad look at the pragmatic and political reasons why the US really ought to back off on exercising its tax sovereignty when it comes to its citizens living abroad. I argue that FATCA and FBAR are either a rather nasty piece of arm-twisting, a bit of bad faith in
the U.S. diplomatic relations department, or, worse, they are signaling a loss of faith in the pursuit of cooperation through diplomacy. I suggest that carving out an exception for US persons who are using bank accounts to live their lives as residents and often dual citizens abroad could provide a means of backing away from either of these destructive positions.

4 comments:

Very good column. I'll have more to say later but a few initial thoughts. I think the Obama does really have to decide whether they want an intergovernmental solution or just try to ram this down everyone's throats. The problem is much of management at the Treasury gives strong indications every time it seems like an intergovernmental solution is at hand that they are really looking for other countries to simply impose the FATCA "legislation" as enacted by the US Congress on an "as is" basis without any type of real negotiation as to its application. I cannot see any democratically elected foreign government able to simply sign up to FATCA with no real negotiation. I suspect even in the UK which not surprisingly is trying to be most helpful to the US on this issue there will be a backlash once the effects are realized outside of the banking industry and a few civil servants in Whitehall.

The following comments are not mine but I do thing bring out some important points(I actually don't know the person at all):

The US domestic system of tax and financial information gathering recognizes virtually no limits on the power of the US Federal government to intrude into the private sphere of its citizens when it comes to their financial and economic relationships. That power of intrusion and power to collect data, however, is predicated on the assurance by the Federal government that its citizens’ data (“tax information”) collected under the auspices of Title 26 will be kept under extremely tight security and will be released only under certain narrowly defined enumerated circumstances. That limit is embodied generally in IRC Sec. 6103 and its regs.

That’s the socio-political bargain: In exchange for surrendering your financial privacy we, the Federal government, guarantee that it will not leave our control and find its way into the hands of third parties or the public at large.

To an extent that foreign governments – and most US citizens – would find astonishing, taxpayer information cannot even be shared internally with other agencies and branches of the US government. In short, this is a sacred trust and the Senators are justified in their concern that FATCA’s promise of reciprocity will punch a gigantic and potentially uncontrolled breach in the dike that keeps US taxpayer’s data “safe” from the vast ocean of potentially irresponsible exploiters of that information. (Not least of whom would be the OECD and other “one-worlders” of that ilk.)

Tax treaty information exchange provisions are one of the exceptions to disclosure but even here the US has historically proven itself extremely sticky fingered about releasing data. Foreign treaty partners on the other hand have failed to reciprocate in the past mostly because few, if any, have anything like the vast digitized data collection systems now installed in the US financial community.

That, of course, is one of the main attractions of FATCA to the Feckless Five and others: an excuse to introduce exactly this kind of vastly intrusive system for their own domestic purposes.

A quick perusal of the Model Reciprocal Agreement, however, should calm the Senators on the subject of the potential cost to US financial institutions of meeting what the Model is pleased to call “reciprocity”. The data the US commits itself to provide is exactly that data that its financial institutions ALREADY collect under Chapter 3 of the IRC (nonresident withholding). The bank interest of NRA that is not currently reported to the IRS IS already reported if it involves a Canadian account and since all bank interest of US account holders is routinely collected and reported, the regulations have always allowed US financial institutions the option of collecting and reporting NRA interest as well if they find doing so is more convenient for them. In short, it won’t cost US financial institutions much to comply – an IT tweak or two.

The Feckless Five and their FFI’s, however, will have to design and install systems nearly from scratch and will have to provide information that is vastly more extensive than that which the US obligates itself to provide.

An appropriate metaphor for “reciprocity” under the Model (Reciprocal) Agreement would be as follows:

The French will design a custom luxury Citroen limosine and build a factory to produce it, the Germans will special order a Maybach from Daimler and build a separate factory to produce it, the English a custom Rolls Royce, the Italians a Maserati and the Spanish? Hell, I don’t know: a SEAT station wagon with gold trim.

In exchange, the US will offer each of these fine countries a Chevy Cruze with the options and color of their choice - provided they can find one on a dealer’s lot somewhere.

Now that’s the kind of reciprocity any US politician or bank (outside of FL and TX, of course)can live with. Whether the voters of the Feckless Five will find it as attractive is another story.

In the meantime, however, I believe that the really serious objection to FATCA and the one that will have the greatest political potency in the US is the threat of a breach of the walls of the ”Fort Knox” within which US tax information is presently stored and hence a violation of what has been regarded heretofore as a sacred trust/bargain between the US taxpayer and their Federal government.